BlueScope Steel shares tumble on fall from record profits
BlueScope Steel was hammered by investors after its second-half guidance missed market expectations, while a $1bn Port Kembla upgrade faces uncertainty due to safeguard mechanism reforms.
BlueScope Steel was hammered by investors after its second-half guidance missed market expectations, while a $1bn Port Kembla upgrade faces uncertainty due to Labor’s tougher safeguard mechanism reforms.
Shares in the Australian steel maker closed down 10 per cent at $17.84, after it announced a $599m net profit for the first half of the financial year, down more than $1bn from the same time last year.
Broker Barrenjoey said the market may have been spooked after BlueScope stated the federal government’s proposed changes to the safeguard mechanism could have a “material impact” on its Australian steel business.
The company is considering a $1bn refurbishment of a blast furnace at its Port Kembla operations, and said the potential implications of the policy shift – which will progressively reduce the amount of carbon emissions allowable from major facilities over the rest of the decade – were not yet clear for its plans to refurbish the blast furnace.
“As management indicated, the outlook for the Australian safeguard mechanism is creating uncertainty for the Port Kembla operations which we think has driven some of the trading today, but they’re also trading against a weaker outlook and the strong share price performance leading up to today’s result,” Barrenjoey analyst Megan Kirby-Lewis said
BlueScope managing director Mark Vassella said the company was cautious about the outcome of the safeguard mechanism review, but it was still strongly committed to its Australian operations.
“There’s no value here in seeing carbon (emissions) exported if steel was to be produced offshore and shipped back to back to Australia because that capability was lost here,” he said.
“It’s actually a worse outcome for the planet in terms of carbon emissions. And our blast furnace is one of the best performing blast furnaces on the planet. It’s in the lowest quartile of emissions.”
The sharp fall from record profit margins last year came as a result of lower steel prices, higher coal and coating metals costs, and $120m worth of “general cost escalation”.
BlueScope booked earnings before interest and tax of $834.4m, down 63 per cent from the $2.26bn in the previous financial year, with revenue down only slightly to $9.3bn.
While the result was at around the midpoint of its guidance range, UBS analyst Lee Power noted second-half guidance of underlying earnings before interest and tax of $480m-$550m was under his expectations of $600m, and even further below previous consensus expectations of a $620m EBIT.
Mr Power said the difference appeared to be a weakened outlook for BlueScope’s North Star operations in the US, where the company says it expects second-half profit at about half of the $202m earnings for the first half of the year.
“Given the rally in US spreads this is surprising with the UBS assumption for $US350 a tonne spread in the second half appearing to have risk on the upside. While this suggests management is conservative with US assumptions, we note second-half North Star realised pricing is ‘unfavourable’ and conversion costs remain elevated,” Mr Power said on Monday.
Despite the rising input costs and lower steel pricing, Mr Vassella said there was little sign rising interest rates were undermining demand.
“We’ve certainly seen detached housing starts, which is a really key indicator for us, soften. But they’ve softened back to historical levels.”
“They’ve come off the very, very peaky levels that they were at with all of the government stimulus money that was pumped into the economy. So they’re back within a range that we’re really quite comfortable with,” Mr Vassella said.
“The fact that we still have very strong employment numbers and people have jobs and are being paid well helps. We’ll see how that unfolds, but at this stage we’re not seeing any dramatic impact from a demand perspective.”
BlueScope said it was still working through the feasibility studies on the $1bn refurbishment of the blast furnace at its Port Kembla operations in NSW.
The company said it would be monitoring closely the outcomes of the federal government’s push to reform the safeguard mechanism, which could push up costs for major carbon emitters such as BlueScope.
Mr Vassella said the company was still to submit its thoughts to the consultation process on the mechanism, but the company had so far received a “good hearing” from the federal government on its cost concerns.
“We’re working encouragingly with the government around what we think is needed to ensure that we maintain sovereign capability – to have due regard to the availability of technology, and the enablers that go around new technologies, which will allow us to produce lower-emission steel. There’s just not the technology available at this stage,” he said.
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